ASRJC H2 Prelim 2024 P2

1 © ASRJC Economics Department 9570 / JC2 Prelim / 2024 ASRJC JC2 Preliminary Examination 2024 H2 Economics Paper 2 Suggested Answers and Markers’ Comments Question 1 Market failure can occur due to imperfect information. For example, buyers know more information about their health problems than insurance providers in the healthcare insurance market while consumers of healthcare services may not be fully aware of the benefits of consuming healthcare services. (a) Explain how the market fails due to imperfect information in the market for healthcare services and the market for healthcare insurance. [10] (b) Discuss the policies that the Singapore government could adopt to ensure that the market for healthcare services operates efficiently. [15] Suggested answers (part a) Market failure refers to circumstances in which free, unregulated markets fail to achieve efficient allocation of scarce resources. Distortions in the market, for instance, imperfect information, prevent the price mechanism from allocating resources efficiently. In the real world, there is often a great deal of ignorance and uncertainty due to imperfect information. Imperfect information (and thus information failure) occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so mak e potentially inaccurate choices. Market failure may arise due to lack of awareness of benefits in the market for healthcare services and due to adverse selection in the market for healthcare insurance. R1: Market fails due to lack of awareness of benefits in the market for healthcare services. Consumers who consider healthcare services may underestimate their potential benefits as they may not have complete information about the full longer -term benefits from consuming healthcare services such as they did not realise that they could be productive at work which enables them to earn a higher wage in the future. This is an example of imperfect information, creating a divergence between the consumers’ perceived Marginal Private Benefit (MPBperceived) and the actual Marginal Private Benefit (MPBactual) (Figure 1). MPBperceived represents the amount that consumers are willing and able to pay for each additional unit of healthcare service based on what they perceive to be the benefits they enjoy from its consumption. In this case, it is assumed that there are no positive or negative externalities, i.e. MPB actual = MSB and MPC=MSC. Intro R1: Market fails due to lack of awareness of benefits in the market for healthcare services.

2 © ASRJC Economics Department 9570 / JC2 Prelim / 2024 Figure 1: Underconsumption due to imperfect information Individuals will consume healthcare service up to Qe, where MPBperceived = MPC but the socially optimal output level is at Q s, where MSB = MSC. Hence, consumers’ imperfect information has led to an under -consump